Don’t say aye, aye to 3i

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– Neil Collins is a Reuters columnist. The opinions expressed are his own –

It’s hardly surprising that the shareholders in 3i, the listed private equity group, are deeply unhappy at the prospect of having to return 700 million pounds of the 1.75 billion pounds of capital they have received from the company in recent years.

The board has got itself into a hole. That paid-out capital, plus a further 400 million pounds in share buy-backs, was largely financed with borrowed money, and those debts are now coming up for repayment.

A 550 million euro convertible bond launched in August 2003 was designed to provide fresh equity, but it had to be rolled into a 430 million pound convertible bond, and the conversion terms are now pie in the sky. That bond falls due in 2011.

Were 3i an industrial company, it could blame hard times; were it a bank, it would already have abandoned any pretence that a rights issue was anything less than a rescue. It’s neither. It’s a sort of glorified investment company, valued in normal times by reference to its net asset value per share.

Analysts at Cazenove calculate the current NAV at 521 pence, against the credit-crunched market price of 330 pence. The brokers suggest a one-for-one issue at 175 pence, which would raise 738 million pounds before expenses.

It’s almost impossible for an investment company to issue new shares at a significant discount to NAV. It’s highly dilutive to shareholders, and begs the question: if the assets are really that valuable, why not sell some to raise the cash?

Until 3i has a convincing answer to that question, it will struggle to get out of the hole it’s dug itself.